Buyout of farm programs a future policy option?

ARLINGTON, Va. — Would you be willing to accept a government "buyout" in exchange for elimination of farm subsidies?

It has been done, in a fashion, for peanuts and tobacco, and David Orden, senior research fellow at the International Food Policy Research Institute, says discussions of the next farm bill should include consideration of a buyout of the main U.S. farm support subsidies of fixed direct and counter-cyclical payments.

The policy option, he said at the USDA Agricultural Outlook Forum 2005 here, could allow the government to reduce the long-run cost of subsidies and facilitate the liberalization of agricultural trade, while providing substantial transition support to farmers.

"The focus is on whether reforms to decouple farm support programs, which are supposed to reduce their production-distorting and trade-distorting effects, can be made more convincing through a long term buyout that would end farm subsides," Orden said.

Although buyouts have not been feasible in the past, he said recent reforms for several specialty crops include evidence of what might be done.

The 2002 restructuring of the peanut program included a buyout of production quota rights, together with new direct and counter-cyclical payments, and the 2004 tobacco buyout ended quotas and eliminated the loan rate program, without implementing new payment mechanisms. There has been "relative lack of reform" of the support program for sugar.

"One lesson from the two recent reforms is that narrowly-defined benefits – specifically production quotas – may be easier to buy out than broader support policies," he said. "Binding quota rights were bought out for both peanuts and tobacco, but sugar marketing allotments that are only intermittently binding have not been bought out."

Buyout payments "have been quite lucrative," Orden said.

Thus far, he said, there "has not been a convincing buyout proposal" for main U.S. farm support programs.

"The fixed payments adopted in the 1966 farm bill provided a windfall to farmers in a year of high market prices," he said, "but failed to insure a buyout in three respects – a budget baseline remained in place for future farm program spending, the permanent farm program legislation from 1949 and related acts was retained, and the 1996 farm bill took no other steps to bind the actions of future Congresses. When farm commodity prices fell, the next Congress quickly stepped in with additional payments."

Possible focuses

A buyout of the 2002 farm programs could focus on directed payments, the counter-cyclical payments, and/or the loan rate price guarantees, he said. "The fixed direct payments are a narrowly-defined benefit that increases the feasibility of a buyout. Bringing their eventual elimination would ease concerns about continued subsidization, but would accomplish the least economically or institutionally because either the fixed payments or a buyout replacement are relatively decoupled and are a World Trade Organization ‘green box’ policy."

A buyout of the counter-cyclical programs "would accomplish more," Orden said, "since these payments are a particularly contentious form of decoupling likely to have some production-stimulating effects."

Farmers who succeeded politically in building counter-cyclical payments into the 2002 farm bill to address what they felt an inadequate safety net in the 1996 legislation, "are not clamoring to eliminate these new payments," he said. "But government fiscal deficits that had eased when the 2002 farm bill was enacted have increased again, so farm program spending will be under scrutiny."

Overall, buying out farm support payments would raise short term budget costs, but reduce expenditures in the long run, Orden said.

If farm subsidy payments were to be bought out, there is a question as to whether any buyout could be enforced, but he said several steps could improve prospects, including elimination of permanent legislation for farm support programs and a WTO agreement built around a buyout of U.S. counter-cyclical payments.

"Contracts for buyout payments could also require that the acreage for which payments were bought out, and the output from that acreage, would be ineligible for future supports legislated by Congress."

While a buyout would raise short term costs, Orden said, the equivalent annual payments in perpetuity would be less than the 2002 farm bill has delivered in recent years.

"Such a buyout is an investment in the future. It provides long term savings for taxpayers, enhanced transition support for farmers, and a basis on which to pursue more open agricultural markets."